- This is an
appeal from the judgment of Newman J dated 21 February 2003. It involves
a point of
statutory construction that arises in unusual circumstances.
Council Directive 77/187/EEC, known as the Acquired Rights Directive ("ARD")
is designed to safeguard the rights of employees when the undertaking in
which they are employed is transferred from one employer to another. In essence
the ARD requires the new employer to continue to employ the employees on
the same terms that they enjoyed before the transfer.
- Article 1 of the ARD states that it applies to:
"the
transfer of an undertaking, business or part of a business to another employer
as a result of a legal transfer or merger"
The
ARD contains no definition of ‘undertaking’ or of ‘business’. The United
Kingdom
attempted to give effect to the ARD by SI No 1974, the
Transfer of Undertakings (Protection of Employment) Regulations 1981 ("TUPE").
TUPE included the following definition of ‘undertaking’.
"‘Undertaking’ includes any trade or business but
does not include any undertaking or part of an undertaking which is not
in the nature of a commercial venture"
The
effect of the phrase that we have placed in italics is the vital issue
in this appeal. We shall refer to this phrase
as "the words in italics".
- This action involves 122 claimants but it has proceeded by way of the claim
of only one of these, Mr Ronald Davies, who has been treated as a representative
claimant. Mr Davies represents not only the claimants in this action, but
claimants in a number of similar actions. We have been told that this action
will determine the fate of some 2000 employees.
- Mr Davies was
a refuse collector, employed by Liverpool City Council ("the
Council"). The Council transferred its refuse collection service to
a commercial company, Onyx UK Limited ("Onyx"). Onyx now collects
Liverpool’s refuse under contract with the Council on terms that enable Onyx
to make a profit. Onyx offered employment to some, but not all, of those
who had been employed by the Council in its refuse collection service. The
terms and conditions offered by Onyx were less favourable than those the
employees had enjoyed when working for the Council. Mr Davies is one of those
who accepted employment by Onyx on those terms.
- It is now common ground that the transfer of the refuse collection service
from the Council to Onyx was one which fell within the terms of Article 1
of the ARD. The United Kingdom should have introduced regulations that would
have secured for Mr Davies and his fellow employees the protection required
by the ARD. It is Mr Davies’ case that, by including in the definition of
‘undertaking’ in TUPE the words in italics, the United Kingdom erroneously
excluded the transfer of the Liverpool refuse service from the protection
of the regulations. If this is correct, Mr Davies and his fellow employees
are entitled to recover damages from the Government to compensate them for
the prejudice that they have been caused as a result of the United Kingdom’s
error.
- Newman J had to address two issues:
i) Was there a transfer of "an undertaking, business
or part of a business" within the meaning of the ARD? If so:
ii) Was the "undertaking, business or part of a
business" transferred "in the nature of a commercial venture" so
as to fall within the protection of TUPE?
Newman
J held, contrary to the submission of the Secretary of State, that the
Council’s refuse collection service was "an undertaking,
business or part of a business" and that it was transferred from the
Council to Onyx. There is no appeal against that finding.
- Newman J went
on to hold that the refuse collection service was "in
the nature of a commercial venture". This meant that the employees were
within the protection of TUPE and had no claim for damages against the Secretary
of State. Mr Davies claims that Newman J erred in making the latter finding.
He contends that the judge should have held that the refuse collection service
was not "in the nature of a commercial venture" and upheld his
claim for damages.
Background history
- There is an
unusual background to this appeal, which it is necessary to set out in
a little
detail. Only once before has the meaning of "in
the nature of a commercial venture" in TUPE been considered by the Court
of Appeal. That was in the case of Woodcock and others v Committee for
the Time Being of the Friends School, Wigton [1987] IRLR 98. A school,
which had been operated by Quakers as a registered charity, had been sold
to a company. The issue was whether or not this was a transfer covered by
TUPE. The Industrial Tribunal, the Employment Appeal Tribunal and the Court
of Appeal held that it was not, on the ground that the school was
not a business or undertaking "in the nature of a commercial venture".
In considering this question the focus was exclusively on the school before
transfer. The report does not even disclose whether, as we suspect to have
been the case, the company bought it in order to run it as a profit-making
business.
- The Industrial
Tribunal held that the school was not "in the nature
of a commercial venture" because it was not a business in which capital
was invested with a view to profit. The Employment Appeal Tribunal took a
broader view. They held:
"….
the proper meaning of the words ‘in the nature of a commercial venture’
is very much a matter of first impression. The majority
form the view that undoubtedly the operation conducted by the first respondents
was an undertaking in the sense at least of being a trade or business but
that the operation was excluded from being an undertaking within the meaning
of the Regulation because it was not in the nature of a commercial venture.
The way that it was organised, conducted (particularly the way its finances
were conducted), the fact perhaps above all of its charitable status combined,
in the judgment of the majority, to make it an enterprise which could not
fairly be described as an undertaking in the nature of a commercial venture."
- In the only reasoned judgment in the Court of Appeal, with which the other
two members of the court agreed, May LJ held:
"For
my part, although as a general guide I think that the fact that a venture
or enterprise is entered into with a view to making
a profit is a consideration in deciding whether or not it is in the nature
of a commercial one, that is only a general guide and I prefer the first
impression approach of the Employment Appeal Tribunal to the particular question
in issue. I think that it is impossible to define ‘in the nature of a commercial
venture’ so as to cover every particular set of circumstances. I think I
know a commercial venture when I see one and I did not recognise the operation
of this school in the manner found by the Industrial Tribunal as a commercial
venture. The way in which it was organised, to which the Employment Appeal
Tribunal referred, is of course a consideration in enabling me to recognise
or not to recognise the school as being an enterprise in the nature of a
commercial venture. There are many considerations which one has to bear in
mind in taking a global view of the school as a whole. The religious background,
the charitable status, the unpaid committee are all considerations. The fact
that fees are paid, that the object of the Committee is certainly not to
make a loss, but year in year out overall to break even which necessarily
involves the making of a profit in one year if a loss is likely in the next,
or building repairs have to be done, are also considerations which I bear
in mind in deciding whether or not I recognise this particular enterprise
as being in the nature of a commercial venture or not.
Without
in any way seeking to give a definition but to express the sort of indication
which would have its effect upon my mind, I refer
to two definitions, one in the large Oxford Dictionary and one in the concise
volume where in the first ‘commercial’ is defined in one definition as ‘viewed
as a mere matter of business, looking towards financial profit’, and in the
concise volume the first definition of ‘commercial’ is ‘of, engaged in, bearing
on commerce, interested in financial return rather than artistry’. It is
‘rather than artistry’ which I think is the pointer which has an effect on
my mind in preventing me from recognising this enterprise as being in the
nature of a commercial venture."
- In 1994 the European Commission brought enforcement proceedings against
the United Kingdom, alleging a number of failures to comply with the ARD
– Commission of the European Communities v UK [1994] ICR 664. The
European Court dealt with the relevant complaint as follows:
"The third complaint
40 The
Commission argues in its third complaint that the United Kingdom Regulations
of 1981, as interpreted by courts and tribunals
in the United Kingdom, do not apply to non profit making undertakings, contrary
to article 1(1) of Directive (77/187/E.E.C.), as interpreted by the court.
The Commission refers in this connection to Dr Sophie Redmond Stichting
v Bartol (Case C-29/91) [1992] E.C.R. I-3189.
41 Regulation
2(1) of the Regulations of 1981 defines an ‘undertaking’ as including ‘any
trade or business’ but expressly excludes
‘any undertaking or part of an undertaking which is not in the nature of
a commercial venture.’ According to the Commission, whose contentions have
not been seriously challenged by the United Kingdom, the Regulations of 1981
must be interpreted as not applying to transfers of non profit making undertakings.
42 The
United Kingdom submits that the Directive cannot apply, as the Commission
claims, to transfers of non profit making undertakings,
on the ground that such undertakings, which are not engaged in ‘economic
activities’ within the meaning of the E.E.C. Treaty, do not come within its
scope.
43 That
argument must be rejected.
44 The
court has already accepted, at least implicitly, in the context of competition
law (see Höfner v Macrotron G.m.b.H. (Case
C-41/90) [1991] E.C.R. I-1979) or social law (see, in fact, for the application
of the Directive, the Dr Sophie Redmond Stichting case [1992] E.C.R.
I-3189), that a body might be engaged in economic activities and be regarded
as an ‘undertaking’ for the purposes of Community law even though it did
not operate with a view to profit.
45 It
follows from those judgments that the fact that an undertaking is engaged
in non profit making activities is not in itself
sufficient to deprive such activities of their economic character or to remove
the undertaking from the scope of the Directive.
46 Accordingly,
the scope of the Directive cannot, as the United Kingdom contends, be limited
to undertakings which operate with
a view to profit.
47 It
follows that by restricting the application of the national rules transposing
the Directive to transfers of profit making
undertakings, the United Kingdom has failed to fulfil its obligations under
article 1(1) of the Directive. The Commission’s third complaint is therefore
well-founded."
- It is to be noted that, notwithstanding the observations of this court
in Woodcock, the United Kingdom did not seriously challenge the proposition
that, as interpreted by the courts and tribunals in the United Kingdom, TUPE
did not apply to non-profit making undertakings. Rather, the United Kingdom
argued, unsuccessfully, that the ARD did not apply to transfers of non-profit
making undertakings, because they were not engaged in "economic activities" and
thus were not within the scope of the EEC Treaty. We would endorse this conclusion
for the reasons given by the Employment Appeal Tribunal, Mummery J President,
in Birch v Nuneaton and Bedworth Borough Council [1995] IRLR 518 at
522:
"39.
… The decision in the Commission’s case was on the basis of a concession
made by the United Kingdom that non-profit-making
organisations are excluded by the Regulations. That concession is not binding
on the parties, or on the industrial tribunal or on this tribunal. No such
concession has been made by the parties in this case. The Court made no determination
of the scope of the derogation in reg. 2.
40.
Further, as far as the regulations were interpreted by the European Court
of Justice
(which we do not believe they were), that
Court’s powers are limited to the interpretation of community law, and do
not extend to the interpretation of domestic law. That is a matter for the
domestic court."
- Of the two cases cited by the court as exemplifying undertakings covered
by the ARD, Höfner involved a public employment agency and Dr
Sophie Redmond Stichting involved a foundation which provided assistance
to drug addicts and which was funded by subsidies from a Dutch municipality.
- It was common
ground before us that the decision of the European Court in the enforcement
proceedings
did not bind the English court as to the true
interpretation of TUPE. In particular, it did not bind the court to find
that an undertaking "in the nature of a commercial venture" had
to be profit making.
- The United Kingdom had, in fact, anticipated the result in the enforcement
proceedings by removing the words in italics from the definition of ‘undertaking’
in TUPE. This was achieved by the Trade Union Reform and Employment Rights
Act 1993, sections 33(1)(2), 51 and Schedule 10.
- The 1977 ARD has now been replaced by Directive 2001/23/EC of 12 March
2001. A new definition of undertaking appears in Art 1.1(a) as follows:
"(a) This
Directive shall apply to any transfer of an undertaking, business or part
of an undertaking or business to another
employer as a result of a legal transfer or merger.
(b) Subject
to subparagraph (a) and the following provisions of this Article, there
is a transfer within the meaning of this Directive
where there is a transfer of an economic entity which retains its identity,
meaning an organised grouping of resources which has the objective of pursuing
an economic activity, whether or not that activity is central or ancillary.
(c) This
Directive shall apply to private or public undertakings engaged in economic
activities whether or not they are operated for gain.
An administrative reorganisation of public administrative authorities, or
the transfer of administrative functions between public administrative authorities,
is not a transfer within the meaning of this Directive."
This expanded definition of ‘undertaking’ does not represent
a change from the meaning of undertaking in the ARD, prior to amendment,
but seeks to spell out more clearly the meaning of ‘undertaking’ in light
of the jurisprudence of the ECJ. The new definition was first introduced
by Directive 98/50/EC which amended the ARD.
- At an early stage of these proceedings, Toulson J made the following declarations
by consent:
"(a) In
making the Transfer of Undertakings (Protection of Employment) Regulations
1981 (SI 1981/1794) the Secretary of State for
Employment by excluding undertakings not in the nature of a commercial venture
failed to achieve the result required by Council Directive 77/187/EEC; and
(b) By
reason of the legal principles recognised and applied by the European Court
of Justice in the decisions of Francovich & another
v the Italian Republic (Case C6/90); Brasserie du Pecheur v Federal
Republic of Germany and R v Secretary of State for Transport ex parte
Factortame Limited and others (No 4) (Joined Cases C-46/93 and C-48/93)
[1996] ECR 1-1029 and R v Her Majesty’s Treasury ex parte British Telecom
plc (Case C-392/93) [1996] ECR 1-1631 the Plaintiffs are entitled to
be compensated by the Defendant for any loss which they establish has been
caused by the Defendant’s breach of European Community law in failing to
achieve the result required by Council Directive 77/187/EEC as aforesaid."
- In the course of the hearing we expressed concern as to whether declaration
(a) was correct. Mr Paines did not seek to depart from it, but we do not
consider that, in what is a test case, our analysis of the law can be fettered
by the agreed declaration. We shall revert to this matter in due course.
Newman J’s decision
- Newman J recorded
the concession made by Mr Paines that "the refuse
collection service in the hands of the Council was not a ‘commercial venture’" and
his submission that it was "in the nature of one". He referred
to authorities which demonstrated that the status of the Council as a local
authority could not, of itself, prevent it carrying out a function "in
the nature of a commercial venture". One of these was the decision of
the Employment Appeal Tribunal delivered by Morison J in UK Waste Control
v Wren [1995] ICR 974. In that case, the facts of which were almost a
carbon copy of the present, the Tribunal found that cleansing services operated
by Eastbourne Borough Council were "in the nature of a commercial venture".
- Newman J approached
the question of whether the waste disposal service was "in the nature of a commercial venture" as
essentially a matter of the impression made by the material facts. He explained
his conclusions
as follows:
"As
a matter of impression the following factors or circumstances in connection
with the Council’s refuse collection service,
taken together, identify the nature of the undertaking:
i) The
performance of a service to individual and identifiable members of the
public, who by reason of charges imposed upon them were obliged
to pay for the service. I do not regard the indirect nature of the charge
or part payment for the service as significantly affecting the essential
character of the transaction or service.
ii) The
service was performed by paid employees and managed throughout by paid
employees.
iii) In
order for the service to be provided the Council had to maintain an internal
management, follow accounting procedures, acquire
assets (vehicles) and give over the use of property and land to the service.
iv) Although
not bound to make a profit, the Council were subject to requirements of
sound and prudent stewardship in the use
of public moneys. It ran the risk of making a loss.
v) The
service or function, although derived from statute, gained no further colour
or character from the statutory background. It was
required to be cost effective and efficient to meet the requirements of the
householders.
vi) The
power to charge for certain aspects of the service serves to confirm the
lack of significance in the main charge being indirectly
levied.
For
the above reason I conclude the Council were carrying on an undertaking
in
the nature of a commercial venture prior to transfer."
Submissions
- Mr Underhill QC, for Mr Davies, submitted that both UK Waste Control
v Wren and the judgment of Newman J were wrongly decided. He submitted
that "in the nature of a commercial venture" had to be given
the same meaning as "a commercial venture". The words "in
the nature of" were no more than grammatical linkage, adding nothing
to the meaning of "commercial venture". He submitted that it
was in the nature of a commercial venture that the activity under consideration
should be carried on for reward. A commercial venture was one in which
there was a transaction, or series of transactions, in which the person
carrying on the venture supplied something and was paid something in return.
- Mr Underhill
criticised the statement by Newman J that the waste disposal service was
provided
to members of the public "who, by reason of charges
imposed upon them, were obliged to pay for the service". He submitted
that the judge failed to have regard to the evidence, which was that the
service was funded, to a small degree, out of the community charge, but principally
out of subvention from central funds. As to this last point, it is plain
from paragraph 28 of the judgment that the judge was well aware of this evidence.
Mr Underhill submitted that the waste removal service, being provided by
the Council under statutory obligation in circumstances where they did not
charge for the service, did not make a profit from the service and, indeed,
were not permitted by law to make a profit from the service, was a paradigm
example of an undertaking which was not in the nature of a commercial
venture.
- Mr Paines supported the reasoning of Newman J. He submitted that the issue
was essentially one of fact and that we should not interfere with the judge’s
decision unless it was outside the bounds of reasonable judgment, relying
on Edwards v Bairstow [1956] AC 14 and Moyna v Secretary of State
for Works and Pensions [2003] 1 WLR 1929 at p.1935.
The approach to construction
- Newman J observed
at paragraph 21 of his judgment that "some regard
can be paid to the principle that the court should attempt to interpret the
offending exception so far as possible to accord with the purposes of the
Directive". Mr Underhill challenged this proposition. He submitted that
it was plain that the words in italics restricted the ambit of TUPE so that
it did not have as wide a scope as the ARD. It was not possible to give to
the words in italics a meaning that accorded with the Directive. In these
circumstances the correct approach was to give the words their natural meaning.
- We do not accept Mr Underhill’s submission. Nor do we think that Newman
J put the matter sufficiently strongly. The Court is under an obligation,
in so far as the language of TUPE permits, to construe TUPE in a manner which
accords with the ADR. If it is not possible to give the two the same scope,
the Court must go as far towards this as is possible.
- An example of just how far this purposive approach can legitimately go
is provided by the decision of the House of Lords in Litster v Forth Dry
Dock and Engineering Co Ltd [1990] 1 AC 546. In that case the House implied
into a clause which defined a person protected by TUPE as "a person
so employed immediately before the transfer" the additional words "or
would have been so employed if he had not been unfairly dismissed in the
circumstances described by regulation 8(1)".
- The jurisprudence
of the European Court of Justice has led to ‘undertaking’ in the ARD acquiring
the definition of "an organised grouping of resources
which has the objective of pursuing an economic activity". The question
that has concerned us is whether it is not possible, without stretching the
meaning of the phrase to breaking point, to give an undertaking "in
the nature of a commercial venture" precisely the same meaning. If so,
it is the duty of the court to do so. It does not seem to us that the concession
that appears to have been made in the enforcement proceedings that the words
in italics meant ‘non-profit making’ can preclude such an approach.
- Our conclusion
is that the words "in the nature of a commercial venture" are
sufficiently imprecise and elastic to enable TUPE in its original form to
be construed as having the same scope as the ARD. We do not, however, have
to go this far in order to decide this appeal.
- To succeed in his claim, Mr Davies has had to show that there was a transfer
of an undertaking. More precisely, in order to bring this case within the
scope of the ARD, he had to show that there was a transfer of an economic
entity which retained its identity. This he has succeeded in doing.
In so doing he has been keen to demonstrate that the undertaking has had
almost all the same characteristics before and after the transfer. If an
undertaking loses its essential features in the course of a transaction,
that transaction does not constitute a transfer of the undertaking but the
bringing to an end of the undertaking. In this case it is common ground that
the waste removal service was "a commercial venture" after transfer.
We asked Mr Underhill why the test of whether the service was an "undertaking" within
TUPE fell to be applied by considering the position before transfer, rather
than after. He was unable to give a rational explanation for this, other
than to say that other cases have proceeded on this basis. In that last submission
Mr Underhill was correct – see Expro Services v Smith [1991] ICR 577
and Woodcock but we think that this approach is open to question.
- The distinction that Mr Underhill makes between the refuse disposal service
before transfer and the same undertaking after transfer is that before transfer
it was not operated for profit whereas after transfer it is so operated.
It is not possible to see any reason in principle why employees should not
have the protection of TUPE when their employers, who do not operate for
profit the undertaking in which they are employed, transfer that undertaking
to employers who intend to operate it for profit. The truth is, of course,
that the wording of TUPE was designed to do no more and no less than give
effect to the ARD. The ARD draws no such distinction.
- Our conclusion
is that where (i) the undertaking after transfer is a commercial venture
and (ii)
the undertaking before transfer had all the characteristics
that it had after transfer, save that it was not operated for profit, the
undertaking before transfer will normally be capable of being described as "in
the nature of" a commercial venture. We are satisfied that that is so
in the present case. The elastic phrase "in the nature of" bridges
the gap between before and after and enables the provisions of TUPE, prior
to amendment in 1993, to be read in a manner which accords with the ARD.
- For this reason we have reached the same conclusion as Newman J by a somewhat
different route. We note that our reasoning mirrors that of the Employment
Appeal Tribunal in UK Waste Control v Wren at p.986.
- For these reasons this appeal will be dismissed.